By Emily Bary
Meet the competition
Marqeta concedes that it’s in a competitive market, as the company goes up against more traditional players like Global Payments Inc. /zigman2/quotes/201234787/composite GPN +0.75% and Fiserv Inc. /zigman2/quotes/204817680/composite FISV +1.78% as well as “emerging providers” like Stripe and Adyen NV /zigman2/quotes/205351021/delayed NL:ADYEN +2.85% .
Rawat wrote that the more old-school financial-services players “don’t have adequate capabilities and speed-to-market to compete effectively in new-age issuer market,” though she’s “closely watching Stripe as one of the most formidable competitors for Marqeta over time.” Stripe has existing relationships with merchants as well as a more “off-the-shelf” product.
While Rawat highlighted Stripe’s more generalized offering as a possible benefit for that company relative to Marqeta, which has a more customizable product, Jefferies analyst Trevor Williams saw things differently after a number of industry conversations, including with a former Marqeta product vice president. Williams pointed to the customization options as an advantage for Marqeta and said that there are high switching costs of moving to a new platform.
“Our expert believes switches are unlikely unless a business need is not being met by Marqeta,” he wrote, citing the “engineering resources needed to manage a conversion, especially if card products are noncore for the customer (e.g. DoorDash isn’t dependent on interchange).”
MKM Partners analyst Rohit Kulkarni wrote that the upstart fintech competitors have “similar but arguably less sophisticated offerings.”
Marqeta generates most of its revenue from interchange fees, which are fees that merchant banks pay card-issuing banks when a customer makes a transaction with a credit or debit card. “Our agreements with issuing banks provide that we receive 100% of the interchange fees for processing our customer’s card transactions,” Marqeta notes it its prospectus.
Card networks set interchange fees, but the Durbin Amendment in 2010 capped debit interchange. Some smaller banks are exempt from the Durbin limits, however, and Marqeta “currently only contract[s] with issuing banks that are exempt from the Durbin Amendment when we provide program management services,” according to the company’s prospectus.
“In a nutshell, Durbin-exempt interchange [percentage] across consumer and commercial card transactions (both of which Marqeta is exposed to through its different offerings) is likely 1.4% average for consumer (there is a wide range depending on the type of transaction) and >2% for commercial spend,” Bernstein’s Rawat wrote. “This is in contrast to 0.5% average interchange for Durbin-regulated transactions.”
Rawat believes that Marqeta’s work with Durbin-exempt issuers helps the company generate higher revenue “yields” than more traditional partners that work with larger, nonexempt issuing banks, meaning that the company can keep a greater portion of volume as revenue. While she said that investors should monitor the risk of potential changes to exemption rules, she also wrote that “there doesn’t appear to be a willingness by the regulators or government to repeal Durbin exemption or make it harder for fintechs or tech giants to benefit from this.”
A big market
Marqeta processed about $60 billion of volume last year, which it notes is less than 1% of the $6.7 trillion of volume that flowed through U.S. issuers in the same period, based on estimates from The Nilson Report, a payments-industry publication.
“We believe that our share of this massive opportunity will continue to increase due to our unique platform, competitive advantages, and a strong culture of innovation,” the company said in its prospectus.
Rawat wrote that Marqeta’s “growth runway is immense.” Further opportunities include greater international expansion and progress with recently launched credit-processing initiatives, in her view.